Corporate governance is the official rules and regulations created by the top authorities of the company. It makes every decision-maker think in the best interest of the company and stakeholders. Traditional marketers and experts have developed phenomena to keep business functions fair and transparent.
This governance has a lot of factors to consider. In this article, we have mentioned all the essential factors of governance. It includes the relevant definitions, principles, and theories. Let’s start with understanding what governance is and its importance.
What is Corporate Governance?
Corporate governance meaning is referred to as the rules, regulations, and practices upon which a company works. In simple words, a company is directed and controlled by these defined processes. BOD (Board of Directors) also plays a crucial role in establishing the governance of a company. It is made for the benefit of your company’s shareholders, employees, customers, suppliers, and others.
The main goal of this governance is to implement ethics, transparency, and accountability in the business. It allows the company’s people to maintain healthy and conflict-free relations. It includes the shareholders, the board of directors, and all the executive management. Hence, the company works for a long duration. Simply put, governance allows the company to build sustainability, financial integrity, and trust factor before investors and consumers.
Corporate Governance Definition
The governance is defined as established rules, practices, and processes. It allows the company to work in the officially required manner. All the rules and processes are defined by the company’s board. Moreover, it also reduces the conflicts between the company’s working professionals. You can also define corporate governance as a legal and ethical way to run a company because it is crafted by the highest authority of the company.
6 Core Principles of Corporate Governance
Transparency
In this governance, a company has to showcase its policies and practices transparently. Here, you have to reveal everything that directly impacts the shareholder’s rights. It will establish a trust factor between the top-level management and stakeholders of the company. Moreover, you also have to disclose all the matters where money is involved as per this principle.
Fairness
It is a fundamental right given by the company to provide all shareholders with equal opportunities. In simple terms, all the stakeholders have the equal right to show their concerns over any violation. Hence, it doesn’t allow the company to differentiate between any shareholders. It is even regardless of their stakes in the company.
Independence
The governance allows the company authorities to be independent. In simple terms, a company can freely make its decisions without being influenced by any, including the government. Moreover, the board of directors even has to make the decision after assuming their personal interest. Since all the decisions are in the favor of the company, there is no room left for conflicts. In fact, companies often appoint independent directors and advisors to make responsible decisions.
Social Responsibility
This is an additional principle of governance. It makes the entity take part in social issues and contribute to them. In this way, the company builds a positive image in the market that boosts its main motive. Here, you have to practice good governance in order to make the company look responsible.
Accountability
The governance provides accountability along with authority. This means the most authoritative one will have the highest level of responsibility over their shoulders. If you’re the most authoritative, then you have to answer the obligations or questions during any controversy. Generally, companies are divided into two types of accountability. The management of the company is accountable to the board of directors. At the same time, the directors are accountable to the shareholders. They have to take charge in any unfavorable situation.
Risk Management
As per the governance, senior authorities of a company have to identify all types of upcoming risks. It is amongst the principles of corporate governance. Plus, they mutually have to figure out ways to control them. At this point, every considerable member of the common should be aware of all the potential risks.
Importance of Corporate Governance
The governance consists of the relationships between all the stakeholders. Thus, it has a whole different place for the company. Because it has various benefits to contribute to the growth of the company. We have mentioned some of the important factors below:
Protect shareholder’s interest
The governance is made to protect the rights of shareholders in the company. They are the real owners of the company. This governance promotes transparency, fairness, and accountability. It directly saves their rights.
Boost business performance
If you properly follow the governance, then your company will start improving its performance and sustainability. Simply put, your company should maintain transparent financial records, ethical decorum, and effective management. It will attract potential investors and boost the company’s reputation.
Inculcate innovation and adaptability
Good corporate governance always allows companies to maintain a culture of innovation and adaptability. It gives a sense of freedom to the company to make open-minded decisions. Hence, it breaks all the limitations of a company and innovates freely.
Make a long-term player
The governance has a set of official rules and regulations. It allows the company to be consistent over long-term achievements instead of short-term ones. Simply, it is the result of sustainable business practices and alignment.
Therefore, all these pointers show the importance of corporate governance for a company. In this way, a business properly runs over fundamental strategies. Moreover, the company gets a lot of support from its directors, management, and shareholders.
4 Main Theories of Corporate Governance
1. Stakeholder Theory
Unlike the previous theory, the stakeholdership theory has a large perspective. It states that the governance should be in the favor of all the stakeholders. It includes the employees, customers, suppliers, etc. In simple words, the main goal of governance should be creating equal and valuable opportunities for all the stakeholders, not only the shareholders.
2. Stewardship Theory
The stewardship theory supports the managers of the company. It states that leading managers always think for the best interests of the company, its employees, and shareholders. Simply, those trustworthy managers are called the stewards of the company who directly contribute to the benefits of the overall company. In this way, you don’t control the managers. Instead, empower them to plan and execute creatively.
3. Agency Theory
Agency theory is one of the fundamental theories of corporate governance. This theory very well explains the conflict between the shareholders and managers due to their different ownership and control. In simple words, shareholders would face issues if the managers start thinking of their self-interest. Therefore, these rules of governance allow the shareholders to maintain their fundamental rights.
4. Sociological Theory
The social and cultural dimensions of the society significantly impact the organization’s governance structure. It allows the company to showcase its societal values, norms, and power structures. Therefore, this theory states that good corporate governance should be crafted while considering the large societal view.
Wrap Up
Governance plays an impactful role in the business world. It allows all the stakeholders to safeguard their rights in the company. Here, we have mentioned every essential thing in this article. Therefore, your business should also have fair and strict governance rules and regulations.
Frequently Asked Questions
Q1. What is the meaning of corporate governance?
The governance means the defined rules, processes, and procedures. It allows the company’s managers and executives to work in a certain way. These are the official ways that no one should violate, as it is for the benefit of the whole company.
Q2. What is the corporate governance definition?
The governance can be defined as the rules and regulations for the company’s boards and managers. They have to think in the interest of the company’s stakeholders. Therefore, the governance gets so much value.
Q3. What is an example of corporate governance?
When the board of directors organizes a meeting with the shareholders to discuss a certain decision, for instance, they generally discuss potential risks and rewards due to any big decision. It might be the acquisition or merger of the company. This meeting is an accurate example of good governance.
Q4. What are the 4Ps of corporate governance?
The governance consists of the 4 P’s. It includes the people, purpose, process, and performance. This governance is made after considering these to make the company work equally for all. Hence, it allows an equal opportunity for all.